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Sat, 21 Nov 2009 | 08:03 GMT
 

Lenders won't budge on loan prepayment charges

Emirates Business 24/7
 
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Emirates Business 24-7, 25 June 2009

Lending institutions in the UAE are unwilling to waive prepayment charges for mortgage customers as their own borrowing costs remain high, Emirates Business has learned.

The charges are applicable when a borrower pays off part or all of a loan before the end of the term.

"Banks are very unwilling to waive their prepayment charges," said Chris Dommett, CEO of mortgage brokers John Charcol Dubai. "The charges vary from one lender to another."

He said Abu Dhabi Finance (ADF)Abu Dhabi Finance (ADF)Loading... charged two per cent if a borrower repaid within three years of taking a loan and waived the charge after three years. Four per cent was charged at any time if the loan was taken over by another lender.

Phillip Ward, CEO of ADFADFLoading..., said: "We allow up to 10 per cent prepayment of the loan amount without levying any charges on the customer if they are paying out of their own funds, irrespective of when they prepay.

"It is only when they repay over 10 per cent of the loan amount that the charge is applicable. This is our way of recognising the need of end-users to repay loans faster."

Sundar Parthasarthy, Senior Vice-President and Head of Retail Assets at Abu Dhabi Commercial Bank (ADCB)Abu Dhabi Commercial Bank (ADCB)Loading..., said: "We have an attractive policy where if the loan is partially repaid or closed after five years then there is nil cost to the customer. In the first two years there is a nominal fee of two per cent."

Dommett said the two per cent charge applied if the prepayment was made with funds already in the customer's account. ADCBADCBLoading... charged one per cent of the total prepayment amount if the customer prepaid between two and five years of taking the loan.

There was no penalty after five years if the borrower repaid the loan from his own funds in his account. ADCBADCBLoading..., however, charged three per cent if the mortgage was taken over by another lender at any time during the loan tenor.

Parthasarthy said: "This is done in the interest of the market and the bank. Typically a mortgage is a long-term relationship and the average tenor is around eight years. We don't want to encourage a situation where banks are exploited by speculators - for example if a customer buys the property today and sells it during the next two years to make a quick buck. This sort of conduct would create an imbalance and negatively affect the market."

Dommett said Emirates NBD (ENBD)Emirates NBD (ENBD)Loading... charged two per cent of the prepayment amount if the borrower repaid within two years and one per cent after two years. ENBDENBDLoading..., however, charged three per cent if the mortgage is transferred to another lender at any time during the loan tenor.

Niranjan Mendonca, Head of Retail Assets at Mashreq, said: "A loan is amortised over the entire tenor and an institution earns revenue over this period. We do give consideration to customers who are repaying a loan in advance from their own resources and charge them a lower repayment fee than customers who are transferring their liabilities to another institution."

Dommett said Mashreq charged one per cent of the prepayment amount if the loan was repaid less than two years into the loan tenor and no penalty for any prepayments after two years. However, Mashreq charged three per cent if the mortgage was taken over by another lending institution at any time.

Finance House charges two per cent for any prepayment throughout the lifetime of the loan.

Chief Operating Officer TK Raman said: "The two per cent charge is made when the settlement amount comes from the borrower's own funds. There is a five per cent early settlement fee in the case of a transfer elsewhere.

"Our prepayment charges are declared upfront in the offer letter in no uncertain terms when the borrower signs up for the loan. Having said that, we do take a sympathetic view on a case-by-case basis and depending on the individual circumstances of each customer. We use the prepayment penalty more as a deterrent to avoid abuse of the system by borrowers."

"Generally banks and institutions tend to borrow long-term funds to manage mortgage assets and typically they pay a high interest rate on those long-term funds. If a mortgage borrower suddenly halves his mortgage tenor and prepays quickly, banks and institutions have to bear the cost. Also mortgage borrowers tend to flip their loans around a number of lending institutions."

Banks have mixed views about the policy of some institutions to offer 30-year mortgages rather than the more usual 20-year or 25-year loans.

Some said extended loan periods could encourage more buyers into the real estate market.

Long tenors tended to result in lower monthly instalments and in some cases borrowers would end up paying less to buy than they would to rent. However, some banks said lengthier loan tenors would prove more expensive overall than loans with shorter tenors.

ADFADFLoading... is offering home loans for up to 30 years with an age limit of 70.

Ward said: "We do not want to make our customers over-commit to us, that will prevent them having a lifestyle. The 30-year tenor has always been a feature with us and is just another mortgage solution that we have for our customers. This product is aimed at mid-level income earners as an attempt to increase affordability."

"A customer is not always able to take a 30-year home loan as we have the age cap of 70. If a customer is around 30 then he will be entitled to a 30-year home loan. But if he is around 45 he will only be eligible for a 25-year loan tenor."

Parthasarthy said a wise customer would always choose a lower tenor to increase the proportion of each monthly instalment that went towards paying off the principal amount of the loan.

"ADCBADCBLoading... offers tenor of up to 25 years. The amount of business we do gives us a fair indication that this tenor is largely acceptable to mortgage borrowers.

"In most of the mature markets we would see an average tenor of about 15 years and the actual life of the loan would not exceed eight to 10 years. For most mortgage borrowers this is a serious commitment. If there is a situation where a borrower has surplus savings then the general tendency is to prepay the mortgage and try to bring down the tenor as much as possible. The UAE is moving towards this pattern.

"ADCBADCBLoading... is witnessing a steady growth in mortgage loans with the lending skewed more towards completed properties. ADCBADCBLoading...'s mortgage book stands at more than Dh2 billion."

Mendonca said the average tenor for mortgages offered by lenders, including his bank, was in the region of 20 to 25 years.

"While a 30-year tenor would make it easier for a customer to manage his monthly instalments, the principal amount would run down much more slowly. In the long run this would prove more expensive than a loan with a shorter tenor. From a lender's perspective there is additional risk involved with an increase in tenor, and the cost of this risk would eventually be borne by the customer."

Ward added: "Our 30-year home loan offering is only given after we are happy with the risk profile of the buyer. We do a full risk assessment before we offer such extended loans."

Finance House, which regards mortgages as an ancillary business, normally offers 20-year loans.

Raman said: "If a specialist mortgage company is willing to offer 30-year tenor it is a very positive sign because the burden of the individual's monthly loan instalments is lowered. Loan instalments could fall below rent charges, thereby attracting more buyers to the market."

Mendonca said: "With real estate prices holding firm over the past two months and more people showing an interest in buying, it is only natural for lenders to have attractive offerings."

Mashreq continues to offer mortgages with loan-to-value ratios of up to 80 per cent. "In the current situation most financial institutions will deploy available resources into products that offer them the best returns and which are preferably backed by security.

"Home loans offer better returns in the long run and are backed by a mortgage on the property.

"Hence with real estate prices holding firm it is only logical for financial institutions to allocate a larger proportion of their resources to funding property purchases."

Raman said while Finance House was not expecting to capture a major share of the mortgage market, if its securitisation business kicked off then it would have the ability to book more business. "We expect securitisations to pick up in the next three to five years," he added.

By Anjana Kumar

© Emirates Business 24/7 2009

 
 
 
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